INTANGIBLE ASSETS AND GOODWILL
|12 Months Ended|
Dec. 31, 2019
|INTANGIBLE ASSETS AND GOODWILL|
|NOTE 8 - INTANGIBLE ASSETS AND GOODWILL||
Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities.
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of the last day of the third quarter, or more frequently under certain circumstances. For the purpose of the goodwill impairment assessment, the Company has the option to perform a qualitative assessment (commonly referred to as “step zero”) to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary or a quantitative assessment (“step one”) where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach). Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. The balance of goodwill at December 31, 2019 and 2018 was $27.72 million and $35.17 million, respectively and was attributed to the Cannabis reportable segment.
The table below summarizes the changes in the carrying amount of goodwill:
The Company completed a preliminary step one assessment as of September 30, 2019 and concluded no adjustment to the carrying value of goodwill was required, however the fair value of the Black Oak Gallery reporting unit exceeded the carrying value by less than 5%.
During the fourth quarter of 2019, Company’s market capitalization declined more than 50%. The decline coincided with an overall weakening of the legal cannabis industry, primarily due to high taxation and increasing competition from the illicit cannabis market in California. On November 21, 2019 the California Department of Tax and Fee Administration (CDTFA) announced cannabis mark-up and cultivation tax rate changes that will become effective as of Jan. 1, 2020. Management considered the decline in market capitalization and pending increase in taxes to be impairment indicators and performed an interim impairment analysis of the Black Oak Gallery and Blum Santa Ana reporting units as of December 31, 2019, using a “step one” quantitative assessment for each reporting unit.
The Company first reviewed long-lived assets, which resulted in an impairment charge of $0.25 million in the fourth quarter of 2019. The Company then performed a goodwill impairment analysis which resulted in an $7.45 million charge in the fourth quarter of 2019, which approximates the excess of the carrying value over the estimated fair value of the Black Oak Gallery reporting unit.
The Company estimated the fair value of the reporting unit using a combination of the Guideline Public Company and Comparable Transactions methods. These non-cash charges relating to goodwill and other assets were recorded in the Impairment of Intangible Assets line in the Consolidated Statements of Operations.
The results of the Company’s 2019 and 2018 goodwill impairment assessments indicated that no other goodwill impairment existed.
Intangible Assets Net
Intangible assets consisted of the following as of December 31, 2019 and 2018:
In the fourth quarter of 2018, the Company reduced the estimated useful life of its customer relationships to better reflect the expected benefit period. The change in estimated useful life has been accounted for as a change in accounting estimate. The reduction in the useful life increased loss from operations and net loss by approximately $1.58 million for the year ended December 31, 2018.
The Company recorded amortization expense of $3.05 million and $1.72 million for the years ended December 31, 2019 and 2018, respectively. Based solely on the amortizable intangible assets recorded at December 31, 2019, the Company estimates amortization expense for the next five years to be as follows:
Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors or changes.
The entire disclosure for goodwill and intangible assets.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef